- The Pound Sterling consolidates below 1.2600 against the US Dollar as investors await a string of US economic data, including PCE inflation.
- The FOMC minutes failed to offer meaningful cues about the interest rate path.
- BoE Lombardelli wants to see evidence of a slowdown in inflation before backing an interest rate cut.
The Pound Sterling (GBP) trades in a very tight range below 1.2600 against the US Dollar (USD) in Wednesday’s London session. The GBP/USD pair consolidates as the US Dollar is sidelined ahead of the United States (US) Personal Consumption Expenditure Price Index (PCE) data for October, which will be published at 13:30 GMT.
Economists expect the core PCE inflation data – which excludes volatile food and energy prices – to have accelerated to 2.8% from 2.7% in September on year, with monthly figures growing steadily by 0.3%.
Investors will pay close attention to the core PCE inflation data as it is the Federal Reserve’s (Fed) preferred inflation measure for decision-making on interest rates. The inflation data will influence market expectations for the Fed’s likely interest rate action in the December meeting. According to the CME FedWatch tool, the probability for the Fed to cut interest rates by 25 basis points (bps) to 4.25%-4.50% in the December meeting has increased to 65% from 56% a week ago.
Dovish Fed bets have escalated after the release of the Federal Open Market Committee (FOMC) minutes for the policy meeting held on November 7 even though it didn’t offer any meaningful guidance about the interest rate path. Some officials reportedly suggested that the Fed could consider pausing its rate-cutting cycle if inflation remains “elevated”, while others argued that the policy-easing cycle would be needed to accelerate if economic conditions or the labor market deteriorate.
In Wednesday’s session, investors will also focus on the revised Q3 Gross Domestic Product (GDP) growth estimates, Durable Goods Orders and Personal Spending data for October, and Initial Jobless Claims data for the week ending November 22.
By far, the US Dollar Index (DXY) has remained under pressure this week after US President-elect Donald Trump nominated Scott Bessent, a seasoned hedge fund manager, to fill the position of Treasury Secretary. Market participants expect Bessent to execute Trump-stated trade policies strategically and gradually with an intention to avoid a lethal trade war.
Daily digest market movers: Pound Sterling trades with caution amid worries over US tariffs
- The Pound Sterling exhibits an imprecise price action against its major peers on Wednesday. The British currency performs cautiously amid growing worries over the impact of Trump’s tariffs policies on the United Kingdom (UK) export sector.
- In an interview with Financial Times (FT) on Tuesday, Bank of England (BoE) Deputy Governor Clare Lombardelli said, “US trade tariffs would pose a risk to economic growth.” Lombardelli added, “Trade barriers certainly are negative for growth in the short, medium and long term.” However, she refrained from forecasting the likely impact of US tariffs on the economy. “Too early to quantify effects of proposed tariffs,” Lombardelli said.
- When asked about the BoE interest rate cut path, Lombardelli said she wants to see more evidence of colling price pressures for backing another interest rate cut. In her speech at King’s Business School on Monday, Lombardelli warned about risks of inflation remaining higher than the bank’s forecast where wage growth normalizes at 3.5-4% and the Consumer Price Index (CPI) around 3% rather than 2%.
- This week, the UK economic calendar has nothing to offer. Therefore, the Pound Sterling will be guided by market expectations for BoE interest rate action in the December meeting. Traders see the BoE to leave interest rates unchanged at 4.75% next month.
Technical Analysis: Pound Sterling wobbles below 1.2550
The Pound Sterling hovers below the upward-sloping trendline near 1.2550 against the US Dollar, which is plotted from October 2023 low around 1.2040. The outlook of the GBP/USD pair remains bearish as the 20- and 50-day Exponential Moving Averages (EMAs) at 1.2735 and 1.2883, respectively, are sloping downwards.
The 14-day Relative Strength Index (RSI) oscillates inside the 20.00-40.00 range, suggesting that the downside momentum is intact.
Looking down, the pair is expected to find a cushion near May’s low of 1.2446. On the upside, the November 20 high at around 1.2720 will act as key resistance.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
